Charlie Munger’s Nuggets Of Wisdom

Morningstar has an article from 2006 about Wesco Financial’s annual meeting and a “few nuggets of wisdom” from Charlie Munger.

Opportunity cost

  • When you are evaluating any investment, you must compare it to every other available investment, including ones you may already own.
  • So when you hear about the new hot stock in the next can’t-miss sector, ask yourself two questions:
  1. Do I understand the investment as well or better than one I already own?
  2. Is the risk and reward profile of the investment superior to all other alternatives?

Rationality

  • To succeed as an investor, one has to make good decisions that are anchored in reality and free from emotional and cognitive distractions.

Envy

  • When a group of people make money, others are compelled by an irresistible force to get a piece of the action, even though prices have risen so far above fair value as to guarantee disappointing returns.

Learning

  • After you compile all the reasons you should buy a stock, invert the question and state the reasons why you should not buy the stock.

Mistakes

  • Forgetting your mistakes is a terrible error if you are trying to improve your cognition.

Risk

  • There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table (talking about the use of leverage).
  • Taking on risk only makes sense when it is sufficiently outweighed by the potential reward, which is why we only buy stocks when there is a margin of safety.

 

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